An Empirical Study On The Impact Of Left-Tail Risk On Stock Returns

The relationship between risk and return has always been one of the most important themes in the field of asset management research.In the past few decades,the world has experienced multiple periods of financial distress,such as the bursting of the Internet bubble in 2000,the Lehman default in 2008,the European debt crisis in 2010,and the recent COVID-19 pandemic.These crises have made people aware of the important role of paying attention to the extremely low probability of occurrence but the risk of huge losses(left-tail risk)once it occurs in the stable operation of the financial market.In recent years,great progress has been made in the research and improvement of left-tail risk measurement models in my country,but there is little research on the relationship between left-tail risk and stock returns in China.Therefore,the study of the impact of left-tail risk on stock returns in this article is of great significance for improving and expanding the existing capital pricing theory and enriching the research on asset pricing in China.This article selects individual stock data in the China-Shanghai-Shenzhen A-share market from January 2007 to December 2020 as the research sample,using univariate portfolio analysis,bivariate independent grouping portfolio analysis and regression analysis to study the impact of left-tail risk on the expected excess return of stocks.Through the empirical research of this article,the following conclusions are drawn:(1)Left-tail risk has a significant negative impact on stock excess returns.After asset pricing factors such as market value and book-to-market value ratio are added to the model,the predictive power of left-tail risk is still statistically significant.And the left-tail risk has a certain long-term predictive ability for the expected excess return of stocks.(2)Through bivariate independent grouping portfolio analysis,it is found that the portfolio strategy of buying stocks with low left-tail risk and selling stocks with high left-tail risk can obtain higher investment returns in portfolios with low book-to-market value ratios,high market beta,high idiosyncratic volatility,high momentum effect,high shortterm reversal and high co-skewness.(3)Through the robustness test,both the Shanghai and Shenzhen stock markets can find a significant negative correlation between the left-tail risk and the expected excess return of stocks,and under the group regression analysis,time period regression analysis and the measurement of alternative indicators,the negative correlation between the left-tail risk and the expected excess return of stocks is significant.